Thursday, 14 June 2012

QL Resources: Fortune Smiles on Surabaya

We continue to like QL’s lead in the poultry and marine manufacturing industry, as well as its success in replicating its growth strategy in the Asean region. Case in point was its new marine plant in Surabaya, Indonesia, for which we had the honour of being its first visitors. The plant, which complies with EURO and HACCP standards, is equipped with automated machines to produce surimi and fishmeal. Additional lines for surimi and fishmeal production are slated to be ready by Aug 2012 and early 2013 respectively. Maintain BUY, an unchanged FV of RM3.46.

“Hello” Surabaya! We recently visited QL’s marine manufacturing plant in Surabaya, Indonesia that produces surimi and fishmeal. The plant has modern surimi production facilities which consist of automated operating lines for fish processing. The company gave a short briefing prior to our tour of the plant. We believe the 7 ha at the plant should easily accommodate the expansion of QL’s surimi and fishmeal operations in FY13 given the ample free space. Thanks to the stable demand for surimi, abundant fish supply in Indonesia and the increase in production capacity, we believe QL’s Marine Products Manufacturing (MPM) division will perform well moving forward.

Becoming a bigger catch. The group is building a new frozen surimi factory in Hutan Melintang (15k tonnes p.a), a new cold room for surimi-based products in Johor Bahru (5k tonnes p.a), and a frozen fish cold room in Endau (2k tonnes p.a). Elsewhere, QL’s attempts at replicating the success of its integrated livestock farming business in Vietnam and Indonesia are also bearing fruit. The Vietnam poultry farm will ramp up production from 250k to 350k eggs per day (epd) by March 2013 while in Indonesia, the group is targeting to achieve 900k epd by March 2013 compared to 350k epd currently. Meanwhile, the palm oil division’s rapidly maturing Indonesia palm oil estates should start contributing from FY13 onwards.

Maintain Buy. QL’s exposure to three highly sustainable basic food industries, backed by its solid business model, has enabled the company to deliver consistently remarkable results in the last 25 years. In recognition of its dynamism, the company won the prestigious “The Edge Billion Ringgit Club 2011- Company of the Year” award. Its expansion into ASEAN countries with growing populations such as Indonesia and Vietnam will open up new and profitable markets, which bodes well for the company’s long-term growth. Maintain BUY with FV of RM3.46, pegged to 19x CY12 EPS.

Overview of global surimi industry. In the early 1960s, the Japanese developed the technology for surimi production, which was followed by high growth of the surimi industry. About 2-3% of the global fishery supply, amounting to 2-3m tonnes of fish, is consumed for the production of surimi and surimi-based products. Surimi is typically made from low value unutilized white-fleshed fish such as lizard fish, big-eye snapper and croaker. The US and Japan are the main manufacturers of surimi while Thailand, China, Vietnam, Chile, the Faeroe Islands, France and Malaysia are among the emerging surimi producing countries. The world production for surimi and surimi-based products stands at around 600k tonnes, of which 350k tonnes are estimated to be consumed by Japan alone. Thanks to the steady global demand (especially from Europe and the South-East Asian region) and the limited supply of fish stocks, the price of surimi has remained fairly stable over the years.

King of surimi in Malaysia. As the leading surimi producer in Malaysia, QL has four marine manufacturing plants in Malaysia and one marine plant in Brondong, Surabaya. In Malaysia, it commands a 50% market share and produces 25k tonnes of surimi and 35k tonnes of surimi-based products. It is also the largest fishmeal producer in Malaysia, manufacturing 25k tonnes of fishmeal per annum. In light of the bountiful supply of fish in Indonesia and the promising outlook of the global surimi industry, the group decided to set up a marine manufacturing plant in Brondong, Surabaya in Aug 2011.

Tour of Brondong marine plant. QL’s 7h a marine plant in Surabaya complies with EURO and HACCP standards. It is equipped with automated machines for producing surimi and fishmeal. The fish supply comes from more than 10 ports, with the bulk coming from the nearest fish landing port at Brondong to ensure the freshness of the final product. The fish handling here is less automated than that in the marine plant in Kota Kinabalu, where the de-headed fish is manually moved along the production line. According to management, there is no need to automate this process for the time being as the cost of labour in Indonesia is still very low compared to that in Malaysia. The surimi plant has an annual capacity of 5k tonnes currently, and the group plans to ramp up production by another 5k tonnes by Aug 2012.

Fishmeal plant tour

Turning waste into money. Through a continuous process of cooking, pressing, drying and milling, the leftovers from surimi production, such as fish bones, can be transformed into fishmeal. This fish by-product is commonly used to feed poultry and farmed fish. The drying process in Surabaya is powered by coal, which is widely available and the cheapest source of burning. Going forward, QL expects to add a new production line for its fishmeal operations by early next year to boost the annual capacity to 10k tonnes from 5k tonnes currently.